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Fed’s Waller discusses private sector and Fed’s roles in payments
On November 12, the Fed’s Christopher Waller addressed a conference in New York City, discussing the roles of the private sector and the Fed in the payments ecosystem. Waller emphasized that while the private sector is typically more efficient in providing goods and services, in some cases government involvement is needed to solve for market inefficiencies such as a lack of coordination and incomplete markets. His remarks focused on the Fed’s role in payments in clearing in the U.S., and how this role has evolved over time.
Waller recounted key milestones in the development of the U.S. payment system, noting that the Fed has played a crucial role since its establishment, particularly in providing a nationwide check-clearing system and a telegraph wire transfer service (known as the Fedwire Funds Service). He also noted the Fed’s recent efforts with FedNow to address coordination problems in instant payments, leveraging its connections with thousands of financial institutions to promote efficient and responsible innovation.
Waller argued that the private sector is better positioned to develop and deploy new payment technologies due to its willingness to take on innovation risks, its efficient allocation of resources, and its ability to explore how well new technologies can address actual shortcomings in the current payment system. However, he noted that the government also can play a role “to narrowly address problems like those of coordination that can’t always be efficiently solved by the private sector alone.”
House Financial Services Committee scrutinizes bank regulators’ actions
On November 20, the House Financial Services Committee held a hearing titled “Oversight of Prudential Regulators” to question the directors and focus on the recent actions and future plans of the Fed, the FDIC, the NCUA, and the OCC. The hearing featured testimonies from Michael Barr, Vice Chairman for Supervision at the Fed; Martin Gruenberg, Chairman of the FDIC; Todd Harper, Chairman of the NCUA; and Michael Hsu, Acting Comptroller of the OCC.
Rep. Patrick McHenry (R-NC), Chairman of the Committee, criticized the agencies for neglecting interest rate risks, leading to significant bank failures. He stated, “Your backward-looking approach to regulations harmed our financial system, innovation, and consumers.” Chairman McHenry and other Republican members of the Committee co-sponsored H. Res. 1574, “Calling for the termination of Federal Deposit Insurance Corporation Chairman Martin J. Gruenberg from his position, effective immediately.”
The CFPB’s Section 1033 open banking rule was a significant topic. Rep. Bill Foster (D-IL) supported the rule for increasing competition and consumer control over financial data. As previously covered by InfoBytes, the CFPB’s Section 1033 final rule would mandate that financial institutions, credit card issuers, and other financial providers make covered data available to consumers and third parties in a standardized format. The final rule has also been the subject of litigation alleging the CFPB exceeded its statutory authority under the Dodd-Frank Act by requiring banks to provide customer financial information to third parties without proper authorization from Congress (covered by InfoBytes here). Rep. Foster asked if the Fed had considered issues related to bank data requests and liability in the case of data breaches. Michael Barr confirmed the Fed’s consultation with the CFPB and the need for clarity on these issues.
Another key discussion was the potential pause in rulemaking. Following a letter calling for agencies to halt all rulemaking by Rep. French Hill (R-AR), Rep. Zach Nunn (R-IA) and Rep. Byron Donalds (R-FL) echoed Rep. Hill’s concerns and urged regulators to halt new regulations until the incoming administration takes office. Michael Barr and Martin Gruenberg indicated that major rulemakings, such as Basel III, would be revisited next year.
Maryland appellate court reinstates consumer claims against debt collectors for alleged deception
On November 6, the Appellate Court of Maryland reversed a lower court’s dismissal of a class action lawsuit alleging violations of the Maryland Consumer Debt Collection Act (MCDCA) and the Maryland Consumer Protection Act (MCPA). The plaintiffs, a class of two individuals, claimed debt collectors filed lawsuits to collect money they knew was not owed, constituting unfair and deceptive practices under Maryland law. The lower court had ruled that the common law litigation privilege barred these claims, providing immunity to the debt collectors for statements made during proceedings.
The appellate court held that the litigation privilege does not bar claims under the MCDCA and MCPA against debt collectors. The court indicated that it discerned “nothing in the MCDCA or MCPA to indicate that the General Assembly contemplated that debt collectors could gain litigation immunity inside the courthouse for unfair debt collection practices that are expressly prohibited outside the courthouse.”
The court emphasized that the litigation privilege is typically limited to defamation-like claims involving reputational harm and is not intended to shield debt collectors from liability for unfair debt collection practices. The court also rejected the argument that the professional services exemption in the MCPA protected the attorney involved, ruling that the exemption does not apply to the commercial aspects of law practice. Accordingly, the court concluded that the lower court erred in dismissing the complaint, reinstated the plaintiffs’ claims, and remanded the case.
FDIC extends comment period for its custodial account NPRM
On November 18, the FDIC announced it would extend the comment period for its NPRM on recordkeeping for custodial deposit accounts by 45 days. The initial comment period, which began on October 2 was set to close on December 2 but has now been extended to January 16, 2025, to allow interested parties more time to analyze the proposal and prepare comments.
As previously covered by InfoBytes, the FDIC released this NPRM aimed at strengthening recordkeeping requirements for banks holding deposits from third-party non-bank companies (i.e., fintechs).
The proposed rule aims to enhance the recordkeeping requirements for FDIC-insured depository institutions to ensure the protections of beneficial owners and depositors under federal deposit insurance. Comments can be submitted via the FDIC’s website, email, mail or hand delivery and comments will be public.
CFPB finalizes rule on defining larger market fintech participants
On November 21, the CFPB issued its final rule defining larger participants in the digital consumer payment applications market. The rule does not impose new substantive consumer protection requirements, but it does subject larger participants to CFPB supervision, and it amends the CFPA by establishing how nonbanks qualify as larger participants. The final rule specifies that a nonbank and its affiliated companies must facilitate at least 50 million consumer payment transactions denominated in U.S. dollars and must not be a small business concern under the SBA size standard. The market examples include consumer financial products and services like digital wallets, payment apps, funds transfer apps, and peer-to-peer payment apps.
As previously covered by InfoBytes, this rule was proposed over a year ago to supervise large non-bank fintech firms that offer services like digital wallets and payment apps; however, the proposed version would have been applicable to firms handling greater than 5 million transactions per year (rather than the 50 million threshold set by the final rule).
The final rule affects Subpart A of the CFPB’s existing larger-participant regulation; 12 CFR part 1090. Subpart A prescribes the procedures, definitions, standards and protocols that apply to the CFPB’s supervision of larger participants. The final rule incorporates these existing provisions while setting forth a new test to determine larger participant status in the digital consumer payment applications market.
The criteria for determining larger participants are designed to capture prominent market actors without overburdening smaller ones. By setting the threshold at 50 million annual transactions and excluding small business concerns, the CFPB aims to supervise entities that have a significant impact on the market while allowing smaller participants to operate with fewer regulatory burdens. This targeted approach ensures that the CFPB can monitor and address risks effectively in the digital consumer payment applications market.
The final rule also highlights the CFPB’s consultation with other agencies during its development. The CFPB consulted with the FTC, the Fed, the FDIC, FinCEN, the NCUA, the OCC, and the SEC to ensure consistency among other agencies’ objectives. The final rule will go into effect 30 days after publication in the Federal Register.
CFPB extends applicable dates of its medical debt advisory opinion
On November 21, the CFPB submitted a joint status report regarding two cases, noting the Bureau is extending the applicable date of its medical debt advisory opinion from December 3 to January 2, 2025, an additional 30 days, in response to ongoing litigation. As previously covered by InfoBytes, plaintiffs have alleged that the CFPB violated the APA through their October 1 advisory opinion on collecting medical debts.
According to the joint status report, the extension aims to provide the court with sufficient time to rule on pending motions for a temporary restraining order and preliminary injunction filed by the plaintiffs challenging the opinion. The CFPB asserted that the advisory opinion itself does not create any binding legal obligations that the plaintiffs will need to comply with and as such, revising the applicable date will not affect legal obligations of regulated entities.
FTC announces company will reopen claims process for refunds
On November 18, the FTC announced that a federal court has ordered a jewelry company to reopen its claims process and notify consumers, primarily active duty servicemembers, to submit refund claims. This follows from the company’s settlement with the FTC and a multistate group led by the New York Attorney General’s Office. As previously covered by InfoBytes, the FTC alleged that the defendants violated TILA, the FTC’s “Holder Rule,” and the EFTA, among other things, by: (i) making false or unsubstantiated claims that financing jewelry purchases through the company would result in higher credit scores; (ii) misrepresenting that the protection plan was required to finance purchases; and (iii) failing to provide clear written disclosures and meet authorization requirements for contracts.
The company was ordered to cease debt collections, provide refunds for protection plans, issue refunds for overpayments, and help remove negative credit entries. The claims process is now available from November 18 to December 21. Consumers are urged to request refunds via the company’s website promptly if they purchased items from the company, paid for a lifetime jewelry and watch protection plan, those who have not received a response to their previous claims, and those who have not yet filed a claim. The company must also complete its shutdown and dissolve after fulfilling its obligations under the settlement with the FTC.
CFPB urges the U.S. Supreme Court to not review a trust debt collection case
Recently, in a case between the CFPB and a student loan trust, the CFPB submitted a brief challenging the appellant’s efforts to reverse a U.S. Court of Appeals for the Third Circuit decision, which found that trusts are covered persons under the CFPA, and allowed a CFPB enforcement action against trusts to resume. As previously covered by InfoBytes, the 3rd Circuit remanded the case to a district court after evaluating two issues: (i) whether the trusts are covered persons subject to the CFPA; and (ii) whether the CFPB was required to ratify the underlying action that questioned a constitutional deficiency within the Bureau.
The Bureau’s brief begins by examining a constitutional defect: If the statutory provision that restricted the President’s power to remove the CFPB Director requires the dismissal of a civil enforcement action that was initially filed while the removal provision was in effect. The appellants argued the enforcement action should be dismissed due to this defect. The CFPB’s brief, however, argued that a dismissal is unwarranted because the petitioners have not demonstrated any causal link between the removal provision and the enforcement action. The brief noted that the CFPB has continued the action under multiple directors who are fully removable by the President.
The brief then discussed whether the trusts, which contract with third parties to service student loans and arrange for third parties to file debt-collection suits in the trusts’ name, qualify as “covered persons” under Dodd-Frank Act. The petitioners contended they do not engage in offering or providing a consumer financial product or service because they contracted with third parties to litigate debt collection suits. The CFPB’s brief argued that the trusts are “covered persons” because they are involved in the business of collecting debt and servicing loans through third-party contracts — a necessary part of their operations.
Additionally, the brief addressed the ordinary meaning of “engage in” as interpreted by the Supreme Court in another relevant case, asserting that the trusts’ activities fall within this definition. The CFPB emphasized the trusts’ governing documents explicitly state their purpose to engage in acquiring, servicing and collecting student loans. The brief urged the Supreme Court to deny the petition for a writ of certiorari.
Congressman David Scott urges President Biden to expedite FDIC vote on Basel III endgame rules
On November 13, a House Financial Services Committee member Rep. David Scott (D-GA) sent a letter to President Biden urging him to support the Fed’s recommendation to re-propose the Basel III endgame rules. Scott requested the President’s assistance in compelling the FDIC to proceed with a vote to begin negotiations.
The letter addressed the delays that have hindered negotiations between the Fed and FDIC, warning that further stalemate could jeopardize the completion of the final rule before the Trump Administration takes office in 2025. Rep. Scott called on President Biden to urge the FDIC board to set aside “partisan tactics” and move forward with the vote.
As part of his request, Scott highlighted the importance of striking the right balance between ensuring financial stability and economic growth, noting that excessively high capital requirements could increase funding costs for banks, which could ultimately burden households and businesses. He underscored concerns — brought by civil rights organizations, public pension funds, affordable housing advocates, and agricultural industries — about the potential negative impact of high capital rules on lending sectors, particularly for underserved and minority communities.
CFPB publishes ombudsman report on student loan borrower challenges
On November 15, the CFPB published its 2024 Annual Report of the CFPB Student Loan Ombudsman, highlighting the challenges and changes in the student loan system during 2023-2024. Among other things, the report described challenges faced by the student loan system stemming from the return to repayment of 28 million federal student loan borrowers after a payment pause, as well as the DOE’s efforts to correct servicing errors including payment processing issues, incorrect repayment information, and customer service failures. The report also identified additional issues such as borrowers experiencing unauthorized withdrawals, overpayments and delays in loan cancellation processing.
The report also discussed federal student loan programs, including systemic reform efforts like the implementation of the “SAVE Plan” and income-driven repayment account adjustments. The report emphasized the need for consumer protections when borrowers encounter servicing errors and program disruptions, and it described the DOE’s efforts to remediate a “long history of servicing failures.”
The CFPB’s report also described issues in the private student loan market, stating that private loans can be riskier and more expensive than federal loans. Among other things, the CFPB reported that private borrowers reported significant financial hardship, unaffordable payments, and difficulties in obtaining loan cancellation based on school misconduct. The report criticized the practice of “transcript withholding” specifically by colleges and universities as a debt collection tactic.
Based on its review, the CFPB made three recommendations: First, borrowers should be held harmless when they encounter servicing errors; second, servicers should be held accountable for performance failures; and third, policymakers should consider a broad program overhaul to reduce the prevalence of student loan debt.